Landlords are paying too much tax

New research suggests landlords are missing out on a number of important tax breaks.

Landlords play an increasingly important role in the British housing market, with one in five households set to be renting privately by the year 2020.

What’s more, landlords enjoy a number of important tax benefits. Sadly though, many are not entirely confident on the tax breaks open to them.

According to new research from Paragon Mortgages, a considerable number of landlords are failing to take full advantage of the tax breaks open to them. Indeed, more than one in ten landlords are failing to claim for mortgage interest, despite that being such a significant cost!

Paragon surveyed landlords on which expenses they deduct from their income tax, which produced the results below.

Clearly many landlords have no idea just how much they can claim in tax relief, and for what. Let’s take a look at how to ensure you don’t hand over more cash than is necessary.

Interest on your borrowing

Let’s start with the big one. The interest on any borrowing you do to help with the costs of your buy-to-let business – so not only the mortgage, but personal loans and overdrafts too – can be deducted from the income generated by the property, before tax is payable.

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So any borrowing you do to help with the upkeep of the property, for example on repairs or a refurb, the interest on that borrowing is all completely tax deductible!

Fees, fees and more fees!

One of the areas that many landlords are failing to claim for, according to Paragon’s survey, is in the area of fees. 37% don’t claim on their legal fees, nor on their accountancy fees, while 33% fail to claim on their management or letting agent fees.

These costs fall within the category of ‘ongoing expenses’ – the costs incurred ‘wholly and exclusively’ in generating income, all of which are tax deductable.

Another example of this is wear and tear, an expense that a third of landlords are failing to claim for. For furnished properties which you are letting out, you can claim for wear and tear on all of those furnishings. You can claim 10% of the rental income for the year (minus water rates and Council Tax) so it can be a significant saving.

Advertising

Another overlooked example of an ongoing expense is advertising.

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Indeed, advertising is one of the few costs incurred before the property is let out that you can deduct. You deduct the cost from the rents received in the first year.

Paying a visit

All landlords are different in terms of how hands-on they are. Some take over the whole process, while others are happy to leave the bulk of the work to letting agents.

However, whether you pop over to the property on a regular basis or once a year, your petrol and vehicle costs are an allowable expense. Of course, you’ll need to show that the trip is ‘appropriate’ – if you’re using the property as a holiday home for a couple of weeks in the summer, you won’t be able to claim your travel expenses back.

Keeping proper records

One very simple, but very important, tip comes from H.W. Fisher & Company, a firm of chartered accountants, and that is to ensure you keep proper records.

Revenue & Customs is really clamping down wherever it sees the opportunity to claim a few more pounds, as we highlighted in Taxman clamping down on Inheritance Tax, and landlords are not exempt from that. So it’s crucial to keep good records, not only because you will manage to avoid nasty fines from the taxman, but also because it will make it easier to identify deductible costs!

What’s in a name?

The name that the property is held in will also affect your tax liabilities – owning the property as an individual is very difficult to do if you establish a Limited Company in which to hold the property.

The way that the rental income is taxed is different if the property is held by a Limited Company, as it is subject to Corporation Tax on the profits rather than Income Tax. Just what rate you will have to fork out depends on your company’s profits.

Getting advice

Despite the Government’s protestations, tax is often taxing. It’s worth picking the brains of a decent accountant if you want to ensure your tax liabilities are as low as they should be, while Paragon’s tax guide is also a useful starting point (link opens as a pdf).

Thanks to H.W. Fisher & Company, Spareroom.co.uk and Move with Us for their help with these tips.

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